VAT mistakes can be very expensive, and a recent First-Tier Tribunal case shows just how easy it is to get things wrong.
The way VAT is charged on hot food was changed in 2012 when the then Chancellor, George Osborne, was forced into a U-turn over his proposed ‘pasty tax’. The result is one of the oddities of the VAT system, where VAT is only charged on takeaway food if it is hot when sold.
The tribunal case involved the sale at a market of rice, wraps and curries. Despite the food being allowed to cool after cooking, it was kept hot for sale. This temperature was considerably higher than the ambient air temperature of the premises and so the judge sided with HMRC.
The taxpayer ended up with a VAT bill for £114,122 covering a four-year period. Retrospective assessments HMRC can normally go back four years when assessing VAT errors, but they can go back further if dishonesty is involved. In addition, a penalty may be applied depending on a taxpayer’s conduct. There is no penalty if the taxpayer has taken reasonable care, but there can be a 30% penalty for carelessness. This can be reduced to zero if unprompted disclosure is made, and 15% with prompted disclosure.
The way VAT is charged on sales can be confusing, because the system contains many peculiarities. For example, peanuts in shells are zero rated, while shelled salted peanuts are standard rated. Physical books are zero rated, but ebooks are standard rated. Services are affected as well – a tutor’s services are zero rated unless the tutor has incorporated, in which case the tuition is standard rated.
With such heavy penalties and a complicated system to untangle, it is essential to understand and charge your VAT correctly.